Missed a 60-Day Rollover? Try Self-Certification

An individual who receives a distribution from a qualified 401(k), profit-sharing or pension plan or an Individual Retirement Account (IRA), can defer recognition of taxable income by transferring the distribution to another IRA or qualified plan within 60 days of receiving that distribution. Unfortunately, there are many situations in which timely deposit of the funds does not occur due to inadvertent errors or unexpected circumstances. If the participant fails to effectuate the rollover within the 60-day period, that individual not only is taxed on the full amount of the distribution, but he or she also may be subject to a 10 percent premature distribution penalty.

The Internal Revenue Code permits the IRS to waive the 60-day rule “where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the individual subject to such requirement.” In most cases, however, obtaining a waiver of the 60-day rollover requirement entails applying for a private letter ruling, which can be a costly endeavor, as it involves payment of an IRS user fee, currently set at $10,000.

In Revenue Procedure 2016-47, released on August 24, 2016, the IRS explains how a taxpayer now may self-certify the justification for a waiver of the 60-day requirement and then complete and report the rollover as if a waiver had been granted. A plan administrator or IRA custodian may rely on the self-certification to permit what otherwise would be a late rollover, but is not required to do so.

There are three conditions imposed for use of the self-certification procedure: (1) the IRS must not have previously denied a waiver request for rollover of all or part of the distribution; (2) the failure to satisfy the 60-day rule must have resulted from one or more of 11 specific circumstances; and (3) the rollover must be completed as soon as practicable after the applicable circumstances no longer prevent the taxpayer from making the deposit. Completing the rollover within 30 days thereafter is deemed to satisfy this requirement.

An error was committed by the financial institution making the distribution or receiving the contribution;

The distribution was in the form of a check, which was misplaced and never cashed;

The distribution was deposited into, and remained in, an account that the taxpayer mistakenly thought was an eligible retirement plan;

The taxpayer’s principal residence was severely damaged;

A member of the taxpayer’s family died;

The taxpayer or a member of the taxpayer’s family was seriously ill;

The taxpayer was incarcerated;

Restrictions were imposed by a foreign country;

A postal error occurred;

The distribution was made on an account of an IRS levy and the proceeds of the levy have been returned to the taxpayer; or

The party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

The plan administrator or IRA custodian may rely on this self-certification unless it has actual knowledge that is contrary to the self-certification. However, the plan administrator or IRA custodian may not rely on the self-certification for other purposes (such as waiving the one-rollover-per-year rule). Additionally, an IRA custodian that accepts a rollover contribution after the 60-day deadline must report that fact on Form 5498.

This new revenue procedure certainly provides welcome relief to many taxpayers, but it is no panacea. Plan administrators and IRA custodians are not required to accept the self-certification and we fully expect that many of the larger institutions will continue to insist upon a private letter ruling. In addition, the IRS itself has cautioned that self-certification is not the equivalent of a waiver of the 60-day requirement. If the IRS, in the course of an audit or other examination, determines that the requirements for a waiver were not satisfied, the rollover contribution will be invalidated and the taxpayer will become subject to taxation and penalties.

Each taxpayer in this situation must weigh the circumstances to determine whether to utilize the self-certification procedure or seek a private letter ruling. Among the factors that will be considered are the dollar amounts involved, the circumstances surrounding the failure to have completed the rollover within the 60-day period, the willingness of the plan administrator/IRA custodian to accept self-certification and the individual taxpayer’s risk tolerance.